Falling down, this is the culprit
Recently, the global market has been bleak, and the most worrying thing for the market is probably the "US debt volcano" that erupts. The yield on the 10-year Treasury note rose as high as 4.89%, the highest since July 2007. As the anchor of global asset pricing, U.S. bond yields have a profound impact on asset prices such as stocks and commodities, and as U.S. bond yields of various maturities soar to new highs in more than a decade, U.S. stocks, gold, crude oil, etc. fell sharply!
There are multiple reasons for the rise in US bond yields, and the resilience of the US economy is the key. According to the US Department of Labor, the US non-farm payrolls added 336,000 in September, far exceeding the market's original expectation of 170,000, the largest increase since the beginning of this year, indicating that the US economy has maintained a good performance in an environment of unprecedented high interest rates. On the one hand, this has led investors to reassess economic growth and expected inflation, which in turn has pushed up long-end interest rates, on the other hand, it has also increased investors' concerns about another interest rate hike by the Federal Reserve, and higher probability of interest rate hikes also corresponds to higher bond yield levels.
The phased supply-demand imbalance in the U.S. bond market also contributed to the upward movement of U.S. bond yields. The United States currently mainly implements a combination of "tight currency / loose finance" policy, in order to stimulate the return of manufacturing, the US government to carry out huge subsidies to enterprises, Trump and Biden administrations in the same vein, spare no effort in infrastructure investment, these have led to soaring US fiscal pressure, the current total US government debt has exceeded $33 trillion, the US government even fell into a shutdown crisis, had to eat food by issuing bonds indiscriminately, the scale of US Treasury bond issuance has indeed risen significantly in recent months.
While the supply of US Treasury bonds has increased sharply, there is a lack of enough investors in the market to "take over". Domestically, the Fed has sharply reduced its position through QT, banks, pension institutions and other financial institutions have fallen into the pain of losses, liquidity is very tight, and the purchase of US Treasury bonds is limited. Overseas, the People's Bank of China, the two main buyers of U.S. Treasuries, has been reducing its holdings of U.S. Treasuries for months, and the Bank of Japan's holdings, while still rising slightly, has limited liquidity and is difficult to buy in large quantities. And considering the recent depreciation pressure of the yen, frequent impact on the 150 mark, it is not ruled out that the Bank of Japan will sell US bonds in exchange for a stable exchange rate of the US dollar. U.S. Treasuries have more supply and less demand, prices are down, and yields are naturally higher.
The apparent convergence of the term premium is also an important reason for the surge in US Treasury yields. It can be seen that recently, yields have shown a "bear steep" pattern (the long-end yield rises more than the short end, resulting in a steeper yield curve), and long-term government bond yields have made up for the rise. Investors are demanding higher term premiums as risk compensation for future uncertainty. On the one hand, this may be due to investors' repricing of medium- and long-term uncertainty caused by the Fed's "higher for longer" policy path, and on the other hand, it may be because the total US government debt has reached a record high, and the US government is still facing a shutdown crisis in November, which has increased investors' concerns about the stability of US debt.
The negative spillover from the surge in U.S. Treasury yields has brought down global capital markets. As a recognized risk-free asset, rising U.S. Treasury yields mean that risk assets are less attractive, putting pressure on risky asset prices. Taking the 10-year U.S. Treasury as an example, the peak yield of the 10-year U.S. Treasury note has broken through to 4.89% since October, and as a comparison, the annualized yield of the S&P 500 index, which is known for its long bull, is only about 7% in 50 years. It is no wonder that during the Mid-Autumn Festival and National Day Double Festival U.S. bond yields soared, investors "empathized and parted love", resulting in U.S. stocks, European stocks, Hong Kong stocks and other "thousands of miles of green".
The surge in U.S. Treasury yields has led to a stronger dollar, as have commodities such as gold, copper and crude oil. Since mid-July, U.S. bond yields have continued to rise, and the investment cost performance has gradually become prominent, attracting overseas funds to accelerate the flow into the United States, supporting the bullish dollar and accelerating the rise of the dollar index, breaking through the highest high of 107.07. Under the pressure of the strong dollar, gold, copper and other commodities have begun to fluctuate to the downside for a long time since July. In early October, when U.S. bond yields broke upwards again, crude oil prices, which were barely maintained by major producing countries such as Saudi Arabia and Russia, could not be supported and closed down continuously.
The surge in U.S. Treasury yields has caused heavy institutions to suffer huge losses, shaking the stability of the financial system. Bond yields are inversely proportional to their prices, and rising U.S. Treasury yields mean a huge drop in U.S. Treasury prices. Taking 30-year U.S. bonds as an example, compared with the peak of 0.702% in 2020, the 30-year U.S. bond yield has risen by nearly 500BPS, which also means that its price has fallen by more than 50%, and large institutions such as pension institutions, funds, and banks that have been bought in large quantities in the past have borne huge book losses, further aggravating the crisis of trust in financial institutions, and the transmission of panic may even trigger a financial tsunami, which previously failed Silicon Valley Bank and First Republic Bank.
Returning to China, the surge in U.S. bond yields is also an important reason for the downward volatility of A-shares. Recently, the A-share policy has been favorable, and the economic data is also improving, but the big A has always fallen more or less, and the Shenzhen Composite Index and ChiNext Index even approached the pre-epidemic low. The soaring yield of U.S. bonds suppresses the overall valuation of Big A from the perspective of liquidity by affecting the opportunity cost of northbound funds. According to statistics, since August, the continuous reduction of positions in northbound funds has exceeded 130 billion yuan, and under such a huge selling pressure, it is naturally difficult for Big A to get out of the rebound market.
However, from a medium- to long-term perspective, there is no need to worry too much about US Treasury yields. At present, the U.S. bond market may have been overadjusted, and U.S. bond yields may have significantly overshooted, with a high probability of falling back. The continuous rise of U.S. bond yields spread to the entire economy through the benchmark interest rate effect, which played a significant role in suppressing consumption, investment and government spending, and the risk of a "hard landing" of the U.S. economy is gradually increasing. Moreover, with the increase in interest rates/total increases, the US government's fiscal austerity pressure is gradually increasing, and it is not ruled out that a negative cycle will be formed with a "hard landing". Once the U.S. economy declines beyond expectations, U.S. bond yields are likely to fall significantly, and at that time, with the easing of external pressure, A-shares may show better performance.
[Note: The market is risky, investment needs to be cautious.] In any case, the information or opinions expressed in this subscription account are exchanges of views only and do not constitute investment advice to anyone. Except for special notes, the research data in this article is supported by flush iFinD】
This article was originally written by "Star Map Financial Research Institute" and written by Wu Zewei, a researcher at Star Map Financial Research Institute